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In Scranton, Mayor Chris Doherty and the city council want to raise property taxes about 25 percent next year with the potential for larger tax hikes in the future.

In Wilkes-Barre, Mayor Tom Leighton planned a 31 percent real estate tax hike for 2013, then scaled that back to 25 percent after he found some savings.

In Hazleton, Mayor Joseph Yannuzzi started out proposing a 60 percent property tax hike and upped that to 75 percent. Now, he's at 83 percent, and city department heads say it's still not enough to do everything that needs to be done.

Northeast Pennsylvania's three largest cities are planning to boost taxes by huge amounts next year to balance their budgets. Their financial struggles symbolize the economic downturn of the past five years but are also more deeply rooted in decades of recurring events: arbitration-mandated labor costs rising faster than tax revenues, large numbers of untaxed buildings owned by nonprofits and stagnating tax bases.

Scranton's and Hazleton's budget woes were so bad, their mayors relied on one-time revenue sources to plug budget holes, but such remedies only delay deficits and possible tax hikes. Long-term solutions remain elusive.

"If I'm a doctor, and I have people presenting with all these similar symptoms all over the place, do I blame the patient?" asked Gerald Cross, executive director of the Pennsylvania Economy League Central Division. The agency is financially distressed Scranton's recovery coordinator and authored a five-year management plan for Hazleton. "Or do I say ... there's a syndrome, it's a disease; it's not an isolated patient getting himself in some kind of self-inflicted illness."

"The public and municipal leaders greatly value the commitment of their career public employees but the municipal coffers can no longer afford the increasing related health care and pension costs, as well as the normal expected increases in wages," the report says.

The report found that "state laws, mandatory (contract) arbitration awards and court decisions have far-reaching effects on the economic health of Pennsylvania municipalities."

"The case studies illustrate the true concerns of elected officials and the career public administrators who can no longer raise sufficient taxes - particularly property taxes - to cover costs to balance the annual budget," the report says. "When revenues are insufficient, mayors look for one-time strategies such as selling an asset, borrowing money or other creative financial bridges to buy time."

Scranton, which was declared financially distressed under state law 20 years ago, and Wilkes-Barre and Hazleton, which never sought the declaration, can relate.

"Throughout the history of Pennsylvania, when you have concentrations of people, whether they're wealthy or low-income, they tend to demand security services and that's why police departments are entrenched in cities and larger towns and boroughs," Mr. Cross said.

The same goes for fire departments.

More people live in cities where homes and buildings are closer together so "fire departments in cities are essential to prevent the spread of fire and loss of life," Mr. Cross said.

"Whereas they're less important in boroughs and townships" where buildings are farther apart and populations smaller, he said.

Smaller populations allow for volunteer fire departments because most boroughs and townships can't afford or don't want or need full-time departments because homes are more modern and less prone to fire, he said.

History has a lot to do with the revenue side of the picture, too. The two largest sources of revenue for most of Pennsylvania's municipalities are the earned income tax and the real estate tax. They can impose fees on garbage collection and similar services and tax the sale of real estate (the real estate transfer tax), but those sources usually produce far less revenue than taxes on wages and real estate.

Scranton collects a 2.4 percent earned income tax and Wilkes-Barre 2 percent. Hazleton is proposing to raise its income tax from 1.25 percent to 1.35 percent next year. Residents in all three cities pay another 1 percent to their school districts.

As home rule charter cities, Scranton and Wilkes-Barre can raise the income tax as high as necessary.

Hazleton is limited to 0.5 percent, but can impose an unlimited amount to cover pension costs, which explains why its income tax is higher than the legal limit.

Neighboring municipalities are limited to 0.5 percent (and another 0.5 percent for school districts). So as cities raise income taxes, they become less attractive places for people to live.

"Once you get above 3 percent combined earned income tax," it's problematic, Mr. Cross said. "Because 2 percent is a week's pay, 52 weeks a year. Two percent starts to be the difference between leaving and staying."

Officials who developed financially distressed Scranton's first financial recovery plan in the early 1990s made exactly that point in arguing for a major restructuring of city government.

Beyond the desire to avoid raising the income tax, collections of it bend with the economy. When people stop getting raises or lose their jobs, which is what happened the past five years, income tax collections stagnate, a real problem when cities have to pay ever higher employee costs caused by union contracts.

The byproduct of the reluctance to raise the income tax means mayors turn almost exclusively to real estate taxes, a relatively stable income source, but perhaps too stable when costs keep rising.

Real estate taxes are based on the assessed value of all real estate in a city, borough or township.

In general, the total assessed values have changed little or declined over the decades in each city, meaning any increase in revenue comes only when tax rates go up.

Hazleton's gimmicks

Hazleton is a good example of a city with a stagnant tax base.

In 2000, the total assessed value of all real estate within city limits was $44.4 million, according to a PEL study of the city's finances released in August. By 2008, the last year the city used Luzerne County's old assessment figures, it was down to $43.9 million.

That had a real effect. First, the highest the city could tax for general purposes was 30 mills under state law. The city reached that limit in 1972.

It could also add real estate tax for limited purposes and it did - another 7.8 mills to pay off loans and 2 mills to pay for recreation between 2003 and 2008. Coupled with the declining real estate tax base, the limits on real estate and income taxes made balancing budgets tough as costs rose.

Until 2009, the city could not raise the basic real estate tax at all. Its only tax increase in the decade before 2009 was a 3.9-mill hike in 2003 to pay for a loan that covered a 2002 year-end deficit of $500,000, That's why the millage to pay off loans rose to 7.8 mills.

"I didn't have the ability to raise taxes (to cover normal costs). Not that I would have, but it wasn't an option," former Mayor Lou Barletta said.

In the meantime, normal costs shot up.

In 2005, the city collected $4.2 million in taxes and paid less than that, $3.5 million, to provide police and fire protection, according to the PEL study. By 2010, tax collection was at $4.7 million and police and fire protection cost more than that, $4.8 million.

And that was after a budgeted 10 percent increase in tax revenues for 2009 and a 53 percent tax hike for 2010.

Those kind of financial pressures meant Mr. Barletta had to get creative. In 2000, when he took office and inherited a $1.2 million budget deficit, he negotiated concessions with city unions, using the threat of the city seeking distressed status as leverage.

"To the credit of the unions, they all sat down with me and we renegotiated some of the contracts. And we were able to get some concessions back," he said.

Two years later, the city had to borrow to cover a deficit, anyway.

In later years, Mr. Barletta pushed the reclamation of abandoned mine land on the city's outskirts to create land suitable for a planned amphitheater project. Under the deal, the project developer, Hazleton Creek Properties, would buy the land and pay the city about $600,000 a year for five years - 2012 being the last - with payments dropping to $20,000 per year through 2017.

The payment drops next year to $20,000, according to Mr. Yannuzzi's proposed 2013 budget, part of the reason the city must raise taxes.

Mr. Yannuzzi has referred to the payment as a "gimmick," a term often used by budget planners to describe one-time revenues.

"We had to find one-time revenue sources to survive," Mr. Barletta said. "That's what I did with the mine-land reclamation project. Joe called it a gimmick. Well, when you can sell a (mine) stripping hole that's contaminated with (toxic waste) for $4 million, that's not a gimmick. That's a lifesaver."

Mr. Barletta also sought to sell the city's water authority to a private company, a deal that could have netted $48 million, and to build a solar power park to power the city and sell its excess power to the school district. The sale money would have been put into an irrevocable trust that paid interest and supplemented tax revenues.

The water authority board rejected the sale in favor of taking over trash collection from the city and paying the city at least $350,000 a year for more than a decade.

In one sense, the city was fortunate. Luzerne County's reassessment went into effect in 2009, allowing Hazleton to use a new assessed value, $1.04 billion. That allowed the city to drastically reduce the millage rate to 1.85 mills, well below the 30-mill limit for general purposes.

That lower millage rate actually allowed the city to collect 10 percent more in tax revenues in 2009 - effectively a 10 percent tax hike on average - though individual tax hikes varied with new assessments.

After that, the city raised taxes 53 percent in 2010, 9.9 percent in 2012 and is proposing the 83 percent hike plus raising the income tax from 1.25 percent to 1.35 percent to pay for pensions.

The city has now raised taxes three of the last four years with next year making it four out of five if that hike goes through. Police and fire coverage, which cost $3.5 million in 2005, is estimated to cost $5.85 million next year.

Scranton's troubled past

Scranton's troubles are more profound and longer lasting.

Officially distressed under state law since 1992, the city has passed several recovery plans, faced state sanctions for failing to follow one plan, emerged from the sanctions with a voter-approved revised plan and fought to have that plan trump arbitration-imposed police and firefighter union contracts all the way to the state Supreme Court.

The voter-approved plan would have limited the contracts to whatever the plan called for, but the Supreme Court ruled in favor of the unions, allowing for pay raises well above the rate of inflation dating back to 2003.

Wilkes-Barre and Hazleton could never mount a similar fight because they never sought distressed status.

Union leaders say Mr. Doherty could have negotiated a better deal than the arbitration awards if he had just been willing to negotiate instead of taking the arbitrated contracts to the highest court. The unions and other critics blame him for taxpayers facing about 25 percent higher real estate taxes next year, potentially 45 percent higher in 2014 and 11 percent in 2015.

In one way, Mr. Doherty, who has led the city since January 2002, was fortunate.

Because he fought the unions in court for years, police and firefighters got no pay raises between 2003 and 2011. When the Supreme Court upheld the arbitration awards for both, it meant massive back pay dating to 2003 that will force the city to borrow $17 million, adding significantly to the need to raise taxes.

Not that keeping the city afloat without the pay hikes was easy. Health care and pension costs rose steeply, costs Mr. Barletta also blames heavily for his city's woes.

Mr. Doherty borrowed heavily early on in his tenure to pay for downtown projects and the city relied several times on one-time revenue sources, too.

For 2004, the city sold its Department of Public Works complex to the Scranton Sewer Authority for $4 million, then leased it back for $1.

For 2007, council used $1.5 million of the sale of the city's golf course to offset a real estate transfer tax hike, though real estate taxes still rose by 25.6 percent, the first hike since 2000.

For 2011, the council cut real estate taxes by 10 percent, contributing to a year-end budget deficit that led to the city having to borrow $9.85 million this year just to pay last year's bills.

Mr. Doherty decried the tax cut and unsuccessfully proposed a 25 percent tax hike this year that the council scaled back to 4.8 percent.

With almost two-thirds of its costs in the Police and Fire departments, the cost-side reason for the city's woes is simple. In the 2004 budget, the projected cost of the Police and Fire departments ate up 79 percent of the total anticipated collections of real estate and earned income taxes. Next year, projections show the cost of the two departments will eat up all the money raised by both taxes plus 3.4 percent on top of that.

And that's with the 12 percent real estate tax hike already included.

Mr. Doherty said part of the city's problem is legacy costs.

For decades, retiring firefighters and police officers were guaranteed free health care coverage for life. He ended the practice, but the costs persist.

In 2013, the city, which pays all its employees' medical bills directly and does not buy medical insurance, paid almost $6.2 million for active employees and more than $8.2 million for retirees.

It is likely to take two decades or longer before the city no longer has to pay health care costs for retirees, he said.

Wilkes-Barre's difficult choices

The city has faced little of the drama when it comes to budgeting that Scranton and Hazleton have - no lengthy court battles and no limit on real estate taxes.

When Mr. Leighton has needed more money, he has raised taxes.

Faced with an emaciated police force, high crime rates and a $10.8 million budget deficit when he took office in January 2004, Mr. Leighton immediately asked city council for and received permission to raise real estate taxes 20 mills. He also imposed a $52 emergency services tax to replace the $10 occupational privilege tax.

The city had not raised real estate taxes since the 1980s.

"The city could not continue to operate on revenues from the 1980s," Mr. Leighton said. "It was 2004, and we had to make some very difficult decisions."

For the next four years, taxes stayed the same and the mayor was re-elected in 2007. A year later, he succeeded in getting the council to pass a 23-mill increase for 2009.

Mr. Leighton was re-elected with no serious opposition in 2011. In October, he proposed a 30-mill real estate tax hike for 2013, raising the city's recycling fee from $40 to $50 and increasing the cost of its per-bag garbage collection fee by 25 cents a bag.

He dialed back the millage hike to 25 mills after laying off 11 firefighters and four Department of Public Works employees and offering early retirement incentives to others.

The council has not signed off so far.

"We don't take raising taxes lightly," he said. "We evaluate the budget every year. We analyzed the revenue stream every year and we watch what our expenditures are. The problem is we can't really predict the revenue stream. We can estimate historically. It's been very difficult because of the economy."

In each city, real estate transfer taxes are down and income tax collections are relatively level because private-sector pay raises have subsided.

Over the years, the city has reduced the size of its City Hall workforce by 35 people, trimmed its public works staff by eight and now the firefighters.

The story is the same as Scranton's and Hazleton's.

"Despite our best efforts, the city still faces difficult decisions in the coming months," Mr. Leighton said in his budget address. "We have cut expenses, cut jobs, and still mandated expenses are outpacing our available funds. ... We have come to the point where the government that we currently have is no longer the government that we can afford. The cost to provide the services that our residents expect continue to rise and we must proceed responsibly to ensure that sufficient funds are available to pay for what the people want."

He highlighted the increasing costs in his budget message.

In 2003, employee benefits, including pensions, cost $3.9 million. By the end of 2011, they added up to $10.6 million. Despite cutting many jobs during his tenure, salary costs were up $2 million, he said.

Mr. Leighton asked city unions to give up 3 percent pay raises in 2013, a request the unions rejected, prompting the layoffs.

"Well, the biggest problem now is the increases in wages, health care and pension benefits," he said. "We made a commitment that we're going to try to maintain the services that we have today. No one wants services to be cut, but as our expenditures on the personnel side are increasing, our revenues are not increasing at the same level."

Unlike Scranton and Hazleton, Wilkes-Barre has not relied on large one-time revenue sources that come from selling assets, but not for lack of trying. Mr. Leighton hoped to sell the city's golf course, as Scranton once did, but legal barriers prevented that. Earlier this year, the city Parking Authority rejected his attempt to lease its parking garages, lots and meters to a private company for $20 million, though the mayor has revived the idea in recent weeks.

No easy fix

The long-term solutions to cities' financial woes are simple and complicated.

Simple because mayors must either cut costs or raise revenues to keep budgets balanced.

Complicated because deciding which costs to cut and finding new revenues is difficult.

Having had the deepest experience with the existing system, Mr. Doherty said Act 111, the state law that requires binding arbitration if negotiations with police and firefighter unions fail, must be amended. Mr. Leighton and Mr. Barletta agree.

"It's killing us and every community," Mr. Leighton said.

Arbitrators must be required to take into consideration a city's ability to pay for police and fire protection, they said. Mr. Doherty favors going further: eliminate binding arbitration.

The process favors unions because their lawyers more frequently use arbitrators than any individual city. An arbitrator who angers a union lawyer with an unfavorable ruling risks never being used again in future cases, Mr. Doherty and Mr. Leighton said.

"I think it's inherently against cities because if a ruling goes against a city, there's really no penalty to be paid because they're off to another city," Mr. Doherty said.

Mr. Doherty is also lobbying the state General Assembly to allow counties to impose a 1 percent sales tax that cities could share, a move Mr. Leighton favors, too.

"We're providing services for people here that don't contribute to the tax base," he said, referring to the large numbers of commuters who work in the city and live elsewhere. "And sometimes they're using more of the services than the taxpaying people are."

Mr. Barletta, who never had his city's unions go to arbitration but still ended up with costs that exceeded tax revenues, said he favors giving municipalities a new source of revenue - a share of the tax on casinos based on population. Municipalities develop projects that compete for gambling tax money now.

"We're not at a point where we could be competing for projects," Mr. Barletta said. "Cities are at a point where they're (just) providing services like police and fire(fighting) and fixing the street."

Last week, Democratic state senators outlined a list of proposals to tackle the issues of distressed cities like Scranton, Wilkes-Barre and Hazleton. Proposals ranged from providing assistance to urban homebuyers to revamping the Act 47 fiscal recovery program. The Democrats, who are in the minority in Harrisburg, said the proposals would be a 2013 state budget priority.

Mr. Cross favors amending the law to take into account a city's ability to pay but is less sure amending the law is a permanent solution.

"If Act 111 went away tomorrow, I do not believe it would solve the underlying fiscal problems of our cities," he said. "It would go a long way toward slowing down the escalation in costs, but it would not change the basic fundamental problem."

The problem is aging cities with poorer, older taxpayers and stagnating tax bases. He refuses to believe mismanagement of the cities is the problem.

"There's no question that there's mismanagement at some level in some towns, and that's easy enough to point out," Mr. Cross said. "What's harder to point out is the inability of competent people - very competent people, mayors that are professionals, finance guys that are professionals, the city councilmen that are professionals - (who) aren't able to make this work. And that it's not because they're all goofs or they're all incompetent."

Contact the writer: bkrawczeniuk@timesshamrock.com

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